Tax analysts have raised concerns in view of a recent Supreme Court of Appeal judgment that all interest-free loans will give rise to an income tax liability in the hands of the borrower, including loans by a founder to a family trust.

In the SCA judgment, a company which developed retirement villages entered into an agreement with the prospective occupant of a unit. In terms of the agreement, the prospective occupant made the developer an interest-free loan and, in return, received a contractual right to live in the unit until he died. The court held the benefit of getting a loan interest-free had to be included in the developer’s income for tax purposes. However, Bob Williams, a tax expert at the University of KwaZulu-Natal, told Business Day the judgment did not lay down a rule that all interest free loans would give rise to a tax liability. Williams said it was important to recall that where a taxable benefit arose from an interest-free loan, the borrower was taxed on the basis that he was deriving a non-monetary benefit, namely a contractual right to have use of money without paying interest. It is the value of that right that is taxable. Another tax law specialist said that for now there was no reason to be alarmed by the judgment if a loan was without a quid pro quo. He said the judgment was fundamental, especially in relation to all those taxpayers who have the ‘benefit’ of not paying interest on loan accounts. He said even though the judgment was wide, it should be read and interpreted on the facts of the case.